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What is a REIT?

A Real Estate Investment Trust (REIT) is a corporation that invests in real estate through ownership of real property or securities. REITs receive special tax considerations. If a company elects to file taxes as a REIT, it is exempt from paying income tax on all qualifying income, which it pays out in dividends. However, in order to qualify for REIT status, the company must meet several criteria.

  • Pay dividends of at least 90% of REIT’s taxable income
  • Be jointly owned by 100 persons or more
  • No more than 50% of the shares can be held by five or fewer individuals during the last half of each taxable year
  • At least 75% of total investment assets must be in real estate
  • Derive at least 75% of gross income from rents or mortgage interest
  • Structured as a corporation, trust, or association
  • Managed by a board of directors or trustees

Types of REITs

  • Equity REITs

    Own and manage property.

  • Mortgage REITs

    Deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans.

  • Hybrid REITs

    Invest in multiple real estate asset types.

Public vs Private REIT

Public REITs

  • Trade on a public stock exchange (Provide instant lisquidity as they buy & sell share every day)
  • Trading daily also means investors can push price up or down, reflecting current market sentiment and regardless of actual market value
  • Increased costs to requirements of a publically listed stock
  • History of more volatile pricing

Private REITs

  • Not traded on a public stock exchange (Generally offering only 30 day liquidity)
  • Value REIT is based on the value of underlying real estate (not a “traded” market price)
  • No additional “public listing” related regulatory costs
  • Stable, rational pricing = lower volatility